248. How Iran’s uprising has been driven by economic failure

21:28Robert:So it's quite the financial system is really quite advanced.

21:31Steph:Yeah, I mean, it's very advanced. You have advanced capital markets. You have, you know, a large financial sector. And in fact, there has been research that has suggested that one of the ways Iran was able to absorb the cost of the sanctions was by accelerating the financialization of its economy, creating new asset classes that would allow individuals to find a hedge against inflation and currency devaluation. But of course, if you're trying to soak up all this middle class wealth into a new asset class, you know, you have the classic ones housing gold, foreign currency, but suddenly you have a stock market that for several years was the best performing in the world in real terms.

22:13Steph:Because ultimately, you didn't have a collapse of the economy. So some companies were posting very healthy profits. This was something that basically was a transfer of wealth from the middle class to the shareholding class that owned large parts of these companies. So, you know, there are these strange shades of how inequality is also manifesting in Europe or the UK or the US. Iran is in some respects, and I use this word, I know this is a strange word to use here, but some of what we're seeing in Iran is actually profoundly normal. but it is occurring in a context that is connected to this domestic repression, to these geopolitics, to this strange moment in Iranian history that makes it feel very abnormal.

23:00Steph:But from the very standpoint of what are the weird things happening in Iran's economy, well, they're only as weird as they are in many other countries around the world.

23:09Robert:And the one word we haven't used so far, oddly, is China. just you talked about the stagnation presumably if china hadn't been prepared uh to continue to buy vast amounts of iranian oil actually the economy would have collapsed so china am i right china

23:29Steph:essentially supported iran china has provided a lifeline for the iranian economy but it is not supporting iran to the extent that the country can thrive under sanctions and i think that's really important uh to note i mean this is like subsistence survival yeah i mean basically Basically, to give you to sort of finish the story from earlier, I mean, so China is buying this oil because it's able to access this oil through the network of middlemen. The money is not freely accessible to the Iranian central bank or crucially to Iranian importers. Now, what do you mean by that? Well, so if the central bank is having a hard time getting its hard currency back from its oil exports, that means it's having a hard time supplying the centralized foreign exchange market for importers.

24:18Steph:And Iran, unlike many countries in the region, actually produces most of its final goods that are consumed domestically. But that means it's dependent on major supply chains of parts and inputs that go into the Iranian factories. And there are certain things like smartphones that you import, you don't make in Iran. So if you're an importer in Iran, you have this constant problem of trying to maintain your inventories. And this is something that I think a lot of analysts of sanctions have missed, is that they often think that sanctions is a story of trying to stymie exports. But it's actually a story of making it more difficult to import, both by devaluing the currency and just making the logistics around imports more challenging.

25:03Steph:And this has been a big problem for Iran in terms of maintaining output at its factories. But one of the things that we've seen is a fundamental reluctance of most Chinese companies to trade directly with Iran. Because? Because of the risk of sanctions. Right. Chinese firms in the last 15 years have become more global. Their ambitions are to export to all economies, including the US and Europe. And so they cannot afford exposure to Iran that would potentially get them designated under secondary sanctions risks. And so they've largely avoided Iran. What has happened is that Iran is, again, relying on intermediaries, largely in the UAE, in order to still import goods to the country, including Chinese-made goods.

25:54Steph:But if you were to look at the level of trade that is occurring between Iran and China, it's far below where it was in the pre-sanctions period. And it's really below where it should be for a country of the size and complexity in economic terms that Iran is.

26:12Esfandyar Batmanghelidj:So without the lifting of sanctions, how do you solve this? Because obviously, you know, the president's come out and said there's no money to reduce taxes. And, you know, even though, for example, state employee pay has gone up, it's a real cut, you know, it's a cut in real terms when you look at how much has gone up by. So how do you solve this if you can't do anything about the sanctions?

26:36Steph:There's two things that Iran needs to do. It has tried to do the first in order to avoid doing the second. The first thing is it does have to try and get the sanctions lifted. And that is ultimately the reason why, despite the ideological tenor in Iran and in much of its leadership, it has tried on multiple occasions now with the Biden administration and the Trump administration to find some kind of diplomatic understanding that would allow the sanctions to do. the sanctions to be lifted.

27:07Esfandyar Batmanghelidj:And there was a bit of respite, wasn't there, in 2015?

27:11Steph:Yes, when the first deal was, so they did succeed. That's a great point, Steph. The first deal did succeed, the first attempt, with a multilateral nuclear agreement that basically traded concessions on Iran's nuclear program for the lifting of all secondary sanctions, the US primary embargo remained. But that deal was torn up by Trump in 2018. The deal, in fact, I mean, just to explain how limited the relief was, the deal was fully implemented in January 2016. Trump was elected in November of that year, having already promised on the campaign to tear it up. And that sort of cast the shadow over all of the economic activity that was being undertaken pursuant to the sanctions relief.

27:59Steph:And so we get to 2018. Trump follows through on his promise, isolates Iran's economy. Interestingly, he does so unilaterally. So Europe doesn't come on board with the sanctions at that point, nor does the UK. And basically, Trump demonstrates that the US, acting alone with its secondary sanctions, has enough power within the global financial system to isolate an economy without any other countries actually being on board with that plan. And that itself, I think, has been an important lesson for understanding the sort of power of US economic coercion. But the effect for Iran was that it was then forced to try and negotiate again.

28:44Steph:There wasn't much of an attempt in the first Trump term because that relationship was, you know, Trump was taking a very escalatory approach to Iran. There was an attempt under Biden for various reasons that didn't work out. That's a long story in and of itself. And then again, interestingly, despite Trump being the person who withdrew from the nuclear deal, reimposed the maximum pressure sanctions, killed one of Iran's top generals in 2020, the current Iranian administration was able to get permission, in a sense, from the national security establishment to resume negotiations with the Trump administration at the early part of last year.

29:25Steph:Those negotiations went through, I believe, six or seven rounds. But then Israel attacked Iran. And of course, the negotiations stopped and have not since resumed. So there has been this attempt to get the sanctions lifted. There's so much political paralysis in Iran. The supreme leader remains obstinate and he has failed to understand the gravity of the situation. And I believe he is ideologically blinded. So he has been a barrier to progress here. But this leads me to the second thing that Iran needs to do. And in fact, it's something that they have avoided doing because you really can't do it in a scenario where you don't have economic growth.

30:06Steph:And again, this may sound familiar to some of the economic policymakers listening to this podcast. But Iranian economic planners have consistently described their job to try and alleviate the pressure on the economy as a challenge of what they call economic surgery. And the mindset here is, again, quite sort of typically neoliberal. I mean, the idea is cutting subsidies, being fiscally conservative, trying to manage efficient allocation of resources in a country that is facing a lot of fiscal pressure and low growth. And the idea is that you try and drive growth by creating a more stable economic environment where the private sector can then do the lion's share of the investment.

30:56Steph:The problem is that that doesn't work in a country that has faced stagnation for 15 years. It also actually is out of step with the dominant economic thinking globally today, where there's much more space for state-led investment and the idea of actually trying to de-risk a private sector to come back in and invest in an economy that's been in the doldrums for a long time. But, you know, somewhat ironically, the Iranian economic policymakers are also ideologically sort of blinded. This is not, of course, because they are in an Islamic Republic, it's because they're sort of wedded to certain ways of economic operation.

31:33Steph:There is just now starting to be a debate about rethinking Iran's industrial policy and economic planning in light of some of the shifts globally. But the problem is that what Iran really needs to undertake is a more fundamental restructuring of the economy. And doing that is politically impossible in an environment where you don't have economic growth, because what you're telling elites in the country is you need to give up a portion of your slice of the pie and we need to redistribute basically to restore the purchasing power of ordinary households who are after all the consumers on which our consumer based economy depends.

32:14Steph:and the reality is that until the pie is growing no one is going to be willing to accept a change in the relative size of their pie if it means that in absolute terms their slice of the pie is getting smaller and so this ends up being a fundamental political dilemma that Iranian economic policymakers have not been able to address and so they're sort of stuck in this mindset of economic surgery.

32:40Robert:So can I just ask you on that? So does that mean if they could grow the economy and shift resources to middle classes and those below the middle class who are in dire economic straits, it's conceivable that the protests against the regime would diminish? But I think what you're saying is that this is basically a failed state and that despite the mass murders, those protests are going to come back.

33:14Steph:Well, so that's, you've completely anticipated what I was about to say, which is that I think everything I've just described about the idea of economic restructuring, about finding a new model for Iran's economic development, were sanctions relief to be achieved, that was all maybe feasible or maybe sufficient to get Iran out of this ongoing period of crisis up until a month ago. But the events we've just experienced in Iran, which represent a fundamental rupture of the social contract and which reflect, and I think this is very important to recognize, is that for reasons beyond the economic failures of the government, we have to sort of acknowledge that the Islamic Republic had basically exhausted its political legitimacy in the country.

34:04Steph:because it had tried to undertake authoritarian consolidation with the Raisi government, really undermining the power of electoral institutions. And we saw historic low turnout in Iranian elections where Iran used to be a country where actually people tended to turn out at 70 % for parliamentary and presidential elections. It went below 50%. And people just felt that the regime was at this point not even pretending to try and engage with their demands in a substantive way. And then you had things like the repression of the protests in 2017, 2019, 2022, the Women Life Freedom Movement, which was also violently repressed.

34:51Steph:And we arrive at this point where the grievances, I think, accumulating, given that, for example, in the summer of last year, Iran experienced a war, something it had not experienced since the Iran-Iraq war, which ended in 1988. There was this sense that the Islamic Republic cannot find the answers to these problems. And so the point I'm trying to make is that, you know, I'm fully cognizant that I'm presenting a, you know, diagnosis of a series of economic problems that the economists, budget planners, central bankers in Iran might have some solutions to or some awareness of. But they are now encountering these problems in a sort of febrile political context, which means that in some ways their actions are irrelevant.

35:41Steph:And until there is a reckoning between state and society across these more fundamental political grievances, we have to kind of park these economic questions and simply hope that the economy does not completely collapse. Because the one thing I will note, and again, we can look to Syria or Venezuela, is that when an economy completely goes off the rails and when institutions really start to break down, it's incredibly difficult to rebuild them, even if you achieve the political transition that you want.

36:13Robert:And is there any chance of a transition to some kind of governance that we would recognize as more humane? And is there actually one of the things that's slightly odd to me is literally the only figureheads at the moment of a different Iran appear to be the Shah's family, which is not something any of us expected. So are we going to see a transition? Is there any alternative to the Shah's family?

36:45Steph:So I think I'll take that question in two parts. I mean, we're getting into really, you know, it's a very fraught territory here. Look, the first thing is I actually managed to speak to a friend in Tehran yesterday who works in kind of policy analysis. and there's been an internet shutdown, as I'm sure your listeners are aware. And so this was the first time I was able to have like an hour long conversation with someone. And he had this really interesting message. I mean, he's someone who was a very thoughtful person, you know, who's been in policy circles in Iran for over a decade. And he was just explaining that in his words, no one has a framework to understand even what Iran has just experienced.

37:34Steph:And this is within Iran, that across the political spectrum, whether it's in government or in civil society, in economic sort of groups, there's just really a struggling to understand the complexity of the situation. I mean, you know, we might say it's like an example of a poly crisis really concentrated in one country. But, and I think part of this is also that although the country has faced many crises for a long time now, the, you know, the, the consequential nature of the regime killing 20 ,000 civilians in an environment where we should acknowledge the regime feels that it's on the war footing, because of course, there is a buildup of US forces, they feel this is a continuation of the Israeli operations from the summer.

38:26Steph:there's a lot there to process and people are struggling to do it. So, you know, imagining a political transition and what the pathway is, no one has a clear sense of that. And I think that's dawning even on activists and political thinkers in Iran that have been engaged in this struggle for a long time. So we do have this one figure, a prominent figure in the crown prince, Reza Pahlavi. And, you know, what is striking and has to be acknowledged is that he has stature at this moment because people have seen him as the one very recognizable figure that they could kind of connect their political aspirations to.

39:04Steph:And this is reflected in the fact that his name has been the subject of slogans in Iran, and that it would appear that his call for people to come out and protest was heeded in the main two days of the recent waves of protests. You know, it's important to recognize as well that he is not angling for the restoration of the monarchy. And I think People have criticized him as being kind of opportunistic or it's improper for him to be the person to lead the opposition because Iran doesn't want a monarchy. That's not his political program. He intends to lead a democratic transition in the country. The problem I see, and I have been vocal about this, and his supporters who can be quite rabid in their support have attacked me and others for expressing this, is that he has failed so far to construct a political organization.

40:01Steph:He does the messaging himself. He is, in a sense, an advocate for the Iranian people. But he has at no point in the last sort of 47 years since the revolution actually organized, let's say, for example, a membership-based political organization that has an executive body that is elected, where he could be elected to head that executive body. And as a consequence, there's also very little political organization on the ground in Iran that is connected to his agenda, meaning that the movement around Reza Pahlavi, to the extent it is organized as a movement, remains largely a diaspora movement. In Iran, you have a lot of people yearning for his leadership and his support and making this known in the protests and in their public social media posts and so forth.

40:56Steph:But within Iran, they're not really organized in a way that they could sustain a political movement. And we also have to consider how you get from point A to point B. So even if there were a more profound collapse of the political leadership within Iran, possibly because of U.S. military strikes, which remains something that's on the table, how does Reza Pahlavi get on a plane, come back to Tehran, and basically take authority in a way that allows him to steer the country through the crisis? And I think the problem at this moment is that when these questions are aired, it is seen as an attempt to try and dismiss the protests or dismiss the possibility of change.

41:44Steph:And that's not at all my intention. And I think that's an unfair characterization. I think the importance of raising these questions is that we actually have to answer them because of the imperative of change. You know, you have to have a plan. You have to understand that politics is about organization as much as it is about message. And that even something like a U.S. military strike is not going to be a deliverance for Iran from this very dark period.

42:12Esfandyar Batmanghelidj:Esfandia, loads more to ask you on all of this. But sit tight for a couple of minutes and we'll be back after the break.

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44:46Robert:Before we wrap up, I've just got a couple of other things on my mind. I mean, one is, obviously, there is a mutual antipathy between the Israeli and Tehran Islamist governments. But historically, if you go back now many years, There have actually been quite close links between Israel and Iran. Do you think there is any chance as we look to the future of that sort of that sort of antipathy being eroded? Because I mean, you know, historically, the Iranian people have not been, they certainly haven't been anti-Semitic or anti-Jewish. So is there any scope for that antipathy to be eroded?

45:30Steph:Yes, I think so. I mean, I may not have come across this way in today's conversation, but I am an optimist by nature and I approach my work with an optimistic outlook. I think that is absolutely possible. the thing I would just say is that you know we have to be careful not to assume that the forces of confrontation between Israel and Iran are totally determined by sort of the ideological tenor on either side what I mean by that is that part of the reason why we see this like entropic condition within the Middle East is that there's there's power politics taking place and you know Israel has always been concerned at a fundamental level for its own national security, not just because of Iran's ideological outlook under the Islamic Republic, but because Iran is a strong state that can have profound influence in the region.

46:24Steph:It's also the same reason historically there has been antipathy between Saudi Arabia and Iran, notwithstanding the Sunni-Shia divide, and also between Turkey and Iran. And so we're at this very dangerous moment in the Middle East where I think conflict is much more likely than it seemed even a year ago. Israel has a sort of revanchist outlook and is trying to impose its will. Turkey has played a more active geopolitical role, especially after the events in Syria. and Iran is at a very weak position and so other powers may feel inclined to take advantage of it, of that weak position, including the United States.

47:04Robert:I mean, I was quite struck yesterday. I was outside parliament and there was a demonstration of both Iranians and indeed Israeli supporters all calling for the banning of the IRGC in the UK and it was quite interesting seeing that alliance.

47:16Steph:Yeah, it is a strange alliance and Reza Pahlavi has been to Israel in the last couple of years and cultivated a relationship with senior Israeli officials, including Benjamin Netanyahu. And that may be a relationship of expedience. It's, you know, powerful support for his movement. Israel certainly has a lot of capabilities that could be useful for engineering a political transition. But I think the one thing I would want to emphasize here is that, and this is something that civil society activists in Iran always go back to, is they are keen to protect the question of what Iran's political future looks like from these geopolitical games.

47:59Robert:And should the IRGC be banned by the British government? It's so weird. It hasn't been. It seems slightly weird to me.

48:06Steph:The easiest way of answering that question, having been part of these debates for a long time, is that it would be a largely symbolic move that would potentially contribute to an escalatory dynamic in the region. Now, that has been the argument for a long time. I think this new push led by, for example, the Italian foreign minister to get the IRGC designated at an EU level, it appears that France and Spain are reluctant. You know, this new push has energy because, you know, what is the concern of escalation when there's this U.S. force posture? The U.S. is likely to strike anyway, and so many civilians have been killed.

48:45Steph:What are we actually trying to prevent in terms of a spiraling of this situation? But the move remains symbolic. It does not meaningfully add economic pressure on Iran, because the US designations already do that, including two terrorism designations that are much higher level than what basically the EU and UK can muster. I believe that it in some ways could provide accountability for victims of the recent violence in Iran who want to see the forces that committed the atrocity identified basically as a terrorist group. But it's a very partial form of accountability. And I think that the governments, including the UK government, are weighing carefully the pros and cons of this, even if it makes them seem emotionally disconnected from what's happening.

49:36Esfandyar Batmanghelidj:you've explained the complexities and everything you know incredibly well it's it's so fascinating i guess my final question is just what do you think is going to happen next like what are your

49:49Steph:thoughts on where it's all going to go i'll give a worst case scenario and a best case scenario great um worst case scenario is short term something i was sort of starting to look at this morning after a conversation yesterday with a senior Central Asian diplomat. U.S. military strikes in the region or a U.S. commitment to blockade trade the way that they try to do with Venezuela, I think that could have a profound impact for the global economy, not just because of the energy trade that goes through the congested channels of the Persian Gulf, but also because the economies in the Middle East and Central Asia are far more dependent on connectivity through southern Iranian ports than we generally recognize.

50:33Robert:So it would have knock-ons to quite big economies that are close to Iran.

50:41Steph:Yeah, and the global economy by extension. I mean, I'll put it this way. Iran will likely respond to the blockade by trying to strike not necessarily U.S. naval assets, but possibly commercial vessels. And if you imagine the disruptions associated with global trade from the Houthi targeting of commercial vessels and the impact just on insurance rates here in the city of London, what is potentially down the line for Iran could be much more disruptive than that. So that's a short term worst case scenario that we start to all feel these kind of entropic forces from the region. Best case scenario, I think, is not a short term thing.

51:24Steph:it's a medium to long-term thing, but I continue to believe in it, is that we see the incredible resilience of the Iranian people. And so everything I've described to you, this 15 years of economic malaise, of political pressure, of repression, the fact that the Iranian people continue to not just protest and exercise their political demands to the best ability that they can, but also, and I think this is something that is underappreciated, they get up every day and they go to work and they try and make a living and they try and keep the country going with these small pockets of optimism. I think that points to a profound level of determination and resolve that as long as you keep your eye on that in the medium to long term, you can remain optimistic on Iran.

52:11Steph:And I think for myself and a lot of people, that's what we're holding on to.

52:15Robert:Well, I very much hope the optimistic scenario is the one that plays out. We've obviously all been absolutely horrified by those murders we were talking about at the beginning. You know, as anybody who knows anything about history, you know, it's such a great civilization. It's such a great culture. And, you know, I spend so much of my time thinking if only we could reach some kind of meaningful entente between Iran and the West in particular. I mean, the benefits, not just economically, but just, you know, culturally and in terms of global stability would be so great. So let's all cling on to that optimistic scenario, please.

52:52Robert:Very good to see you, Esvandia.

52:53Esfandyar Batmanghelidj:Yeah, thank you so much. It's been fascinating to hear all that. We'll have to get you back again as things progress.

52:59Steph:Goodbye from me.

53:00Esfandyar Batmanghelidj:And me, Steph McGovern. Bye-bye.

53:17Robert:take the time pursuing your passions. Time once spent sorting and waiting, folding and queuing, now spent challenging and innovating and pushing your way to greatness. So pick up the Irish flute or those calligraphy pens or that daunting Beef Wellington recipe card and leave the laundry to us. Rinse. It's time to be great.